Chile, September 27, 2019 – Chile-based Banco de Crédito e Inversiones (Bci, A2/A2 stable, baa11) announced that its South Florida-based subsidiary, City National Bank of Florida (CNB), plans to acquire Executive National Bank, a small Miami bank focused on real estate financing. The planned acquisition is credit negative for Bci because it reflects the bank’s willingness to further increase its exposure to the real estate market in Florida while maintaining a moderate ratio of tangible common equity (TCE) to risk weighted assets (RWA).
This acquisition follows the bank’s 2018 acquisitions of another Miami-based bank, TotalBank, and five of Walmart’s Chilean financial services subsidiaries. It also comes amid Bci’s ongoing effort to place itself in the forefront of Chile’s shifting credit card acquiring business, initiatives, which combined, risk straining the bank’s management.
Although Executive National Bank’s $455 million assets equal about 3% of CNB’s $15.1 billion of assets, it is CNB’s second acquisition in Miami in as many years and follows an aggressive organic expansion of that franchise. Bci’s 2015 acquisition of CNB increased Bci’s exposure to South Florida real estate to 120% of its TCE (see Exhibit 1). Bci’s South Florida real estate exposure has continued to increase since then as a result of organic growth of around 20% between 2015 and 2018, and Bci’s acquisition of TotalBank (about $3 billion in assets), which is also focused on real estate financing in the region.
Slower loan growth to more sustainable levels, would alleviate pressure building in Bci’s capitalization stemming from continued aggressive expansion in Florida real estate, a market that has historically proven to be unstable. We estimate that Bci’s South Florida real estate exposure will now equal approximately 170% of TCE, up from 116% in 2017.
Following its various acquisitions, Bci has committed to maintaining a stable Tier 1 ratio of at least 10%. However, our estimated ratio of Bci’s TCE to adjusted RWA of 9.5% as of June 2019 is moderate compared with the 15.1% median for global banks with similar credit risk. It is also below the 10.3% average for Banco Santander-Chile (A1/A1 stable, a3) and Banco de Chile (A1/A1 stable, a3), Bci’s main competitors in Chile.
Although CNB will acquire Executive National Bank for $75 million in a cash transaction, the acquisition will reduce Bci’s own TCE-to- RWA ratio by 10-12 basis points, which will further distance the bank’s capitalization from our expectation of a 10% capital ratio as a result of earnings retention and growth. Nevertheless, we do not expect a major deterioration of Bci’s other consolidated key metrics, given Executive National Bank’s adequate fundamentals (see Exhibit 2). Moreover, CNB has exhibited conservative underwriting standards despite its high growth. CNB’s loan-to-value ratio as of June averaged a low 52%. Over the next year, CNB also plans to moderate its loan growth to about 10%, which will partly mitigate asset risks associated with its higher exposure to real estate sector.
Bci’s management is also busy on other fronts. The bank is undergoing a major venture to establish itself at the forefront of the shifting payments business in Chile. In May, Bci established a 10-year joint venture with EVO Payments International, LLC (B2 negative), a payment technology and services provider, to complement the bank’s mobile payment solution MACH, which started in 2017 and provides peer-to-peer payments for over one million subscribers. Following a September 2018 ruling by the Tribunal for the Defense of Free Competition, the Chilean market is shifting from a business controlled by Transbank S.A. to one with multiple participants with increased product offerings for businesses and individuals, and more competition.
Bci also plans to jump start a new Peruvian bank, to be named Banco Bci Perú, which will begin operations following regulatory approvals in 2021 with a $60 million capital investment. In its announcement, Bci said its application for a branch license in Peru focused on commercial lending. Banco Bci Perú will cater to large Peruvian corporates and the substantial number of Chilean companies with operations in Peru. Nevertheless, Banco Bci Perú will remain small. Over the next 10 years, Banco Bci Perú will not exceed 5% of Bci’s $45.7 billion gross loans as of June 2019.
Credit Outlook: 30 September 2019. Pg. 10
Moodys
Atlantic Investors Service 